Info!! Reading The Psychology Of The Market

Just equally of import equally the psychology of the trader is the psychology of *other* traders!  The marketplace itself has a psychology, defined past times the moment-to-moment shifts inwards watch as well as conduct of participants.  There are three questions nosotros demand to enquire almost whatever market:

*  Who is inwards the market? - This is defined past times book as well as relative volume.  More marketplace participation way to a greater extent than institutional participation as well as greater volatility of cost movement.

*  What are they doing? - Are marketplace participants leaning to the purchase or sell side?  Is that leaning shifting over time?  As nosotros shall see, the distribution of stocks trading on upticks versus trading on downticks is helpful inwards reading player behavior.

*  Where are they doing it?  - We listen traders speak almost "key levels" all the time.  Sometimes these are based on support/resistance; sometimes based on ratios as well as inferences from prior moves.  Whatever.  When nosotros come across important shifts inwards "who is inwards the market" as well as "what they are doing", the cost levels at which these shifts tumble out are meaningful.  If nosotros interruption to the downside on significantly elevated book as well as stocks trading on downticks, nosotros should non revisit the grade at which the interruption occurred if this is, indeed, the outset of a marketplace downleg.

Now let's add together a quaternary inquiry to our ongoing monitoring of the market:

*  How good are they getting it done? - How much cost crusade are nosotros seeing equally a business office of a given grade of buying or selling?  Are buyers or sellers moving cost meaningfully higher or lower, or are they having difficulty breaking to novel highs or lows.  Very often, earlier the bulls cause got over from the bears or vice versa, nosotros come across 1 side failing to displace cost significantly.  That side becomes trapped when the other side takes over as well as needs to cover, contributing to a displace inwards the other direction.

Above nosotros come across a nautical chart of a two-hour moving average of the NYSE TICK (red line) versus SPY (blue line) from the outset of September to present.  Note how, during the stitch to highs inwards September, the distribution of NYSE TICK values was non meaningfully positive.  The total of fourth dimension spent below the zilch line of piece of occupation was equally swell equally the total spent above--and truly a fighting greater equally nosotros moved closer to the highs.  This was 1 of the yellow caution lights that had me concerned almost the lineament of the marketplace highs nosotros were seeing.  

Notice how, at the outset of the downtrend, nosotros broke to important novel lows inwards the $TICK measure.  That shift inwards distribution told us that sellers had taken command of the market.  Note that this occurred relatively early on inwards the decline, when SPY was almost 289.  Stocks persistently traded on downticks.

In recent sessions, nosotros cause got seen buyers come upwards into the market, equally nosotros tin dismiss come across past times the two-hour stair out going into positive territory, precisely Federal Reserve notation that they are non "getting it done".  The buying bursts, generally short-covering, are able to retrace solely a relatively small-scale fraction of the prior cost decline.  At some point--and I'm prepared for it to come upwards soon--the selling draw per unit of measurement area volition cause got problem making novel lows as well as buyers volition pace inwards to a greater extent than aggressively, amongst higher $TICK readings.  That is how bottoming processes begin.  

Conversely, if nosotros outset the calendar week lower on expanded book as well as real negative $TICK readings, thus nosotros know nosotros cause got non nevertheless hitting a downside equilibrium.  We tin dismiss read marketplace psychology past times continually updating our assessment of volume, distribution of upticks as well as downticks, as well as the might of both of those to displace price.  This is non thus much a affair of "predicting" what the marketplace volition create equally identifying inwards existent fourth dimension what is truly occurring.

Further Reading:

Tracking How Volume is Moving Price

Home Page as well as Index

.

Info!! Reading The Market's Psychology

One of the commencement things I await at inwards a marketplace position nautical chart is whether the large candlestick bars are dominantly light-green or red.  That is, when nosotros bring attain extension, does that tend to hold upward to the upside or downside?

Let's cry upward well-nigh that.  Range extension denotes volatility over the fourth dimension stream in addition to volatility is highly correlated amongst volume.  When nosotros meet large bars, those are periods of higher volatility in addition to volume.  If large participants are moving the marketplace position higher, nosotros should meet to a greater extent than large light-green bars than carmine ones in addition to vice versa.  It's a quick way of gauging the psychology of the market--which way large, active players are leaning.

Of course, nosotros tin hand the sack formalize that sentiment past times creating a rolling correlation betwixt book in addition to cost change.  Above nosotros meet SPY (blue line) in addition to the rolling two-hour correlation betwixt v infinitesimal cost modify for SPY in addition to v infinitesimal book (red line).  This behaves every bit a variety of "overbought/oversold" measure, telling us when book has been pushing stocks higher or lower.  Notice, for instance, how book was decidedly on the sell side on Feb 28th in addition to hence decidedly on the purchase side amongst yesterday's precipitous rally.  Seeing that shift was an of import tell for detecting the market's psychology.

Notice likewise how Tuesday's book to the downside could non force SPY prices to novel lows.  We had selling activity, but the selling could non displace cost significantly (i.e., it could non interruption the market's trend).  That is an representative of the sentiment of inefficiency, as noted inwards the before weblog post.  We desire to know, non alone if the active in addition to large traders are leaning ane way or another, but how much their leaning tin hand the sack ultimately touching on price.  We're getting enough of selling periods inwards the recent market, per the nautical chart above.  What creates the uptrend is the relative inability of sellers to displace markets meaningfully.  The selling, inwards other words, is inefficient relative to the buying.

Our labor every bit traders is to read in addition to follow the market's psychology, non impose our ain psychology (our bullishness or bearishness) onto the market.  That way that the skilled trader displays emotional intelligence: word inwards reading the psychology of the marketplace position in addition to existence sensitive to that psychology.  Much bad trading is non only the effect of the trader's emotional state, but of the trader's preoccupation amongst what they cry upward *should* move on every bit opposed to what is truly happening.

Emotional tone deafness doesn't move whatever improve inwards markets than inwards relationships--and for much the same reason.

Further Reading:  Calculating the Power Measure inwards Excel
.

Info!! Substance Ideas Inwards Trading Psychology: Reading Marketplace Psychology Amongst Book Too Price

Previous Posts inwards This Series:

Identifying Historical Patterns inwards Markets

Market Structure as well as Adapting to Change

Implicit Learning as well as Somatic Markers

Mirrors as well as Corrective Emotional Experiences

Solution-Focused Change

Changing Problem Patterns

Trading every bit a Performance Activity

Introduction to Trading Psychology

An of import subject throughout the spider web log is that reading the psychology of markets is a essence trading skill. Markets, similar people, bear inwards patterns. Those patterns shift over time, alongside shifts accompanied past times markers that accompany changes inwards state: changes inwards management as well as changes inwards volatility.

The start of import acre marking to live on able to read is volume. Volume tells us *who* is inwards the marketplace. Volume besides correlates highly alongside volatility. When book jumps, it tells us that institutional participants direct keep give-up the ghost to a greater extent than active. When book dries up, it tells us that the marketplace is dominated past times marketplace makers: the liquidity providers. Is a intelligence special or cost motion to a novel bird significant? Volume volition typically render us alongside an answer: events are meaning if they tin give notice attract the participation of large traders. It is their revaluation of assets that creates marketplace trends.

What is most of import nigh book is relative volume: the bird to which electrical flow book diverges from recent volume. If nosotros desire to know if the book from eleven AM to 12 Noon is high or low, nosotros should compare it to the median book posted during that hour. If nosotros desire to know if today's book is high or low, nosotros should compare it to the most recent median volume. Because relative book is as well as then closely connected to volatility, reading book as well as its shifts provides of import clues every bit to how far markets tin give notice give-up the ghost for or against us. That is useful data inwards setting halt loss points as well as turn a profit targets.

Equally important, the sharp trader wants to run into the full book that transacts at each cost over the class of a trading twenty-four lx minutes catamenia or week. The make at which the lion's portion of book has transacted defines a market's value area. Many merchandise ideas--at brusque as well as longer fourth dimension frames--can live on formulated past times handicapping the odds that a marketplace volition render to a value surface area (if higher or lower prices cannot attract volume) or that a marketplace volition convey prices higher or lower than value (if those prices attract volume). The onetime province of affairs defines a make marketplace inwards equilibrium; the latter defines a trending market. In the onetime market, traders brand coin past times fading forcefulness as well as weakness; inwards the latter, they brand coin past times going alongside marketplace direction.

It is the oscillation of cost betwixt make as well as trending modes across a multifariousness of fourth dimension frames that defines the market's complexity, every bit marketplace participants discover their sentiment: either accepting value or redefining it.

The sharp trader tin give notice besides read the psychology of markets past times seeing whether book is dominantly transacted at the market's bid cost (suggesting that sellers are willing to convey lower prices to teach out of their trades) or at the market's offering (suggesting that buyers are willing to pay upwards for higher prices to teach into trades). This stair out of sentiment, which is effectively gauged past times the NYSE TICK Primer post; besides the posts on Cumulative Adjusted TICK; VWAP as well as Range Markets; Identifying Downside Trend Days; Identifying Upside Trend Days; VWAP as well as Day Structure; as well as Recognizing Range Days.

Info!! Why Fourth Dimension Is Telephone Commutation To Trading Psychology

The recent Brexit merchandise together with its volatility has given us an chance to explore an of import together with neglected theme inwards trading psychology:  time.

Here's a useful distinction betwixt novice together with goodness performers:  Under pressure, the novice feels threat together with speeds up.  Heart rate, galvanic pare response, musculus tension--all increase nether pull per unit of measurement area for the novice.  The goodness performer has trained nether pressure.  Under pressure, the goodness slows downward together with focuses.  

Put novices behind a rifle together with the odds are goodness that when the target appears, they volition speed their breathing, start to shake, together with immature adult woman the shot.  Put an goodness sniper behind the rifle together with breathing slows, all motion stops, together with the aim is true.

As a psychologist, I've experienced the same thing.  During my starting fourth dimension years, I felt panic if a customer I worked amongst reported thoughts together with feelings of suicide.  Later, crisis verbalise made me hyperfocused.  I hung on every word.  I became to a greater extent than deliberate inwards my responses, to a greater extent than attuned to the somebody I was speaking with.  So it is amongst mount climbers, professional person athletes, together with elite nation of war machine units.  They supervene upon create out or flying amongst focus together with freedom--the liberty to rest inwards command over a province of affairs together with non allow it to command them.

OK, together with then what does all this convey to create amongst the Brexit trade?

As business office of my trading, I convey a short-term organisation that provides entry together with endure out execution guidance.  The organisation adjusts entry together with endure out points for the market's volatility.  During Friday's trade, the volatility unit of measurement risked past times the organisation was nigh iii times the size of the volatility unit of measurement from the initiatory of all calendar week of June.  The same exact setup immediately could brand or lose iii times equally much equally recently.  It was no dissimilar from tripling trading size all at once.

But it wasn't simply volatility that changed.  Time itself changed!  The organisation industrial plant from trial bars, non chronological bars.  Each bar represents a position out of ticks inwards the market, non a position out of minutes or hours.  For all of Friday, nosotros printed almost 200 bars.  For the initiatory of all Fri inwards June, nosotros printed nearly threescore bars.  

The novice is calibrated to the chronological clock together with thinks inwards damage of touchstone merchandise sizing.  As a result, each merchandise is far to a greater extent than risky.  Under those conditions, marketplace position volatility begets emotional volatility together with either the create out of reactive trading or the flying of the deer inwards headlights.

Calibrated to the marketplace position clock together with adjusting merchandise sizing for volatility, the merchandise opportunities are the same--there are alone to a greater extent than of them inwards a given trading session.  Influenza A virus subtype H5N1 crisis session for a psychologist is an entire therapy compressed into 1 meeting; it is what y'all create all along, alone compressed.  That compression is a catalyst for focus, because each fourth dimension unit of measurement carries greater important together with significance.

The novice trader cannot accommodate to changes inwards the market's clock.  Movement slows, the VIX falls to 12, together with boredom sets in--the demand to trade.  Movement picks up, the VIX nears 30, together with excitement sets in--the create out together with flight.  Once y'all define fourth dimension inwards damage of marketplace position movement, the switch from boring markets to fast ones is similar the alter on a trip the low-cal fantastic flooring from a boring melody to a fast one.  There are times for slower together with faster dancing...our undertaking is to accommodate to the market's music--not trip the low-cal fantastic a given agency regardless of the music that's playing.

Further Reading:  Why Trading Markets is So Difficult
.

Info!! 4 Ways To Read The Psychology Of The Markets

In the recent webinar (the upcoming Chicago workshop.  The commencement subject is using our emotional responses to markets every bit market-relevant information.  Very often, nosotros commencement discovery changes inward marketplace regimes--shifts inward volatility, inward trend, inward patterns of correlation--experientially.  When nosotros reasonably await a marketplace to produce 1 matter as well as it begins to produce something else, nosotros sense confusion, frustration, as well as concern.  The emotionally intelligent trader uses emotion to bring a second, objective aspect at that marketplace as well as reevaluate ideas as well as positions.  The less emotionally intelligent trader becomes caught upwards inward that emotion as well as responds reactively, ofttimes amongst impulsive as well as ill-considered actions.

The 2nd subject is that nosotros tin dismiss read the psychology of other marketplace participants as well as thereby gain a sense for when their buying as well as selling intentions are waxing as well as waning.  The ways inward which markets transact furnish us amongst of import clues every bit to the leaning of large participants, giving us early on identification signals on breakouts, failures of moves, as well as momentum.

There are 4 ways that I've used to approximate the psychology of the markets:

1)  Market Profile - The profile is a tool for identifying where markets are setting value as well as how book is behaving relative to value areas.  Are nosotros breaking out of a value expanse as well as accepting value higher or lower?  Are nosotros oscillating inside a value range?  Viewing profiles on multiple fourth dimension frames tin dismiss assist us empathise marketplace conduct inward a multidimensional way.

2)  Upticks/Downticks - The NYSE TICK (and related measures) is a tool I guide maintain used for years to assess existent fourth dimension stance inward the stock market.  It measures the disclose of stocks trading on upticks minus the disclose trading on downticks every 10 seconds or so.  When large marketplace participants are actively buying or selling, nosotros meet TICK values jump to extreme positive or negative levels.  Shifts inward the distribution of TICK readings over fourth dimension usually accompany marketplace turning points.  

3)  Market Delta Footprint - Whereas the NYSE TICK assesses upticks as well as downticks across all stocks inward the NYSE Index, the Market Delta footprint tracks each transaction inward a item instrument, such every bit the ES futures.  It identifies when a transaction is occurring at the electrical flow bid cost or offering cost as well as cumulates that information over a diverseness of fourth dimension periods.  As a result, nosotros tin dismiss meet when book is dominantly lifting offers (buyers are aggressive), hitting bids (sellers are aggressive), or relatively balanced.  Shifts inward the footprint real ofttimes accompany changes inward marketplace direction.

4)  Event Flow - As described inward the recent post, lawsuit flow divides the book inward whatever musical instrument into many sparse slices as well as examines cost conduct inside each acre to infer the relative authority of buyers or sellers.  That information is cumulated across slices to depict changes inward buying as well as selling dominance.  Unlike upticks/downticks as well as the footprint, lawsuit flow does non rely upon aggressive conduct of buyers as well as sellers to infer the intentions of participants.  This is peculiarly helpful inward markets where sophisticated marketplace making tin dismiss disguise those intentions.

These are multiple lenses through which traders tin dismiss read the psychology of other participants, much every bit a skilled poker histrion inward Las Vegas tin dismiss read the tells of players to a greater extent than or less the table.  The might to meet markets through multiple lenses enables traders to railroad train ideas and--most importantly--revise those ideas based upon existent data.  I aspect forrard to elaborating on the reading of marketplace psychology at the Chicago event. 
.

Info!! Trading Notes For The Calendar Week Of April 25, 2016

Friday, Apr 29th

*  I'll hold upwards talking amongst the Benzinga pre-market prep show at 8:35 AM today.  We'll create got a seem at the psychology of the electrical current market.

*  I beloved this postal service regarding innovating too finding novel merchandise setups from Ivanhoff.

*  Stocks bounced nicely from overnight weakness yesterday but too then stalled at prior peak levels too sold off sharply into the close.  Breadth was non peculiarly poor; fresh monthly novel highs dropped to 915 too novel lows rose a fighting to 235.  Technology/NASDAQ shares broke below their before Apr lows; housing stocks (XHB) also took a hit.  That's non the form of activity you'd await if the marketplace position was pricing inwards economical strength.  Fewer than 50% of SPX shares are trading inwards a higher house their 3, 5, too 10-day moving averages.  Let's encounter if that tin send away convey inwards buyers, equally prior short-term corrections create got been able to do.

*  H5N1 few things dissimilar most this most recent marketplace position drop:  1) higher volatility on the decline, amongst extreme selling on the NYSE TICK measure; 2) the market's inability to rally during USD weakness too commodity firmness; too 3) continued breakdown of correlations amid marketplace position sectors.  It's when nosotros encounter shifts inwards volatility too correlation that nosotros desire to entertain notions of authorities change.

*  My intermediate-term measures are silent nowhere close oversold levels.  I'm quite opened upwards to toppy marketplace position activity hither too an intermediate-term correction inside the bull cycle.  I'm non expecting a precipitous reversal to send marketplace position mode.  Note the precipitous rising inwards VIX.  My Pure VIX model has turned neutral; non yet inwards "fearful" territory.

Thursday, Apr 28th

*  A seem at the recent displace to higher involvement rates, which has affected the trading of higher yielding stocks too stock sectors.

*  Stocks create got fallen dorsum afterward the Bank of Nippon disappointment final night.  We're right away close the lower terminate of the recent trading range.  I haven't noticed item breadth weakness.  Indeed, smaller cap indexes moved to novel highs yesterday, equally did a lay out of large cap sectors.  Much of the index weakness has come upwards from technology scientific discipline shares too the higher yielding sectors.  New monthly highs rose to 1112; novel lows rose a fighting to 209.  My intermediate-term wheel measures are stretched to the upside, however, so I would non hold upwards surprised to encounter farther consolidation.

*  Most of the corrective activity we've seen inwards stocks since the Feb depression has consisted of sector rotation; therefore no meaningful deterioration inwards the breadth numbers.  Below nosotros tin send away encounter a nautical chart of stocks across all the States exchanges making fresh 3-month highs versus 3-month lows.  It has stayed good for yous throughout the recent move.  One of the things I'm tracking going forrad is the grade to which nosotros encounter across the board weakness on pullbacks versus rotational movement. 

Wednesday, Apr 27th

*  Here's a valuable perspective on challenging hedge fund performance from the Mathematical Investor site.

*  My mensurate of breadth volatility has reached depression levels final reached inwards belatedly November, 2015 before the marketplace position drop.  Volume inwards stocks has also been lagging, which has been associated amongst subnormal forrad returns.  That beingness said, breadth improved yesterday, amongst 876 fresh monthly novel highs too 189 novel lows.

*  Note the divergent sector surgery inwards the past times week, amongst higher yielding shares underperforming too commodity-related shares outperforming.  (Graphic from FinViz).  Rates create got been rising ahead of the Fed; I'm keeping a unopen optic on this.  Note also how technology scientific discipline has been lagging.  Rising rates?  Higher commodities?  Low growth?  Can't imagine a stagflation scenario would hold upwards a non bad one...

Tuesday, Apr 26th

*  Excellent interrogation links from Abnormal Returns.  H5N1 non bad aggregation of quant interrogation comes from Quantocracy.  Lots of novel ideas inwards these sources too lots of practiced blogs to follow.

*  So far my trading experiment has been interesting.  I've been placing far fewer trades, solely trading when the marketplace position lines upwards on 3 fourth dimension frames too a short-term signal is triggered.  The signal comes from volatility bands drawn around lawsuit bars, so the bands reverberate what I've been calling pure volatility (volatility per unit of measurement of marketplace position volume).  The target is also based upon a motility inwards pure volatility units.  The really structured nature of the opportunity taking has led to zilch overtrading too a higher hitting charge per unit of measurement on trades.  I'm placing solely a 10th of the trades I was placing before, overall profitability inwards dollar price has non been hurt, too of course of educational activity risk-adjusted profitability has increased greatly.  It is non clear to me that much of the trading nosotros produce adds value.  By structuring rules around our best trades, nosotros tin send away create important gratis fourth dimension for interrogation too life exterior of markets.

*  We saw increased selling push clit per unit of measurement area inwards yesterday's trade, but cost held relatively good too has bounced a fighting inwards overnight trade.  New monthly highs dropped to 586 too monthly lows also dipped to 208.  I'm silent non seeing important weakness across sectors; the key banking company focus the balance of the calendar week volition dominate trade.  

*  We tin send away encounter the market's forcefulness inwards the wheel mensurate below.  My long-term wheel interrogation suggests that nosotros made an of import wheel depression inwards Feb (the prior wheel depression was October, 2014) too create got been inwards a momentum stage of the novel cycle.  I ultimately await the electrical current wheel to create got us to novel highs, driven equally much past times dovish key banks too the postulate for yield equally growth per se.

Monday, Apr 25th

*  There is a psychological procedure that underlies self-confidence--and to a greater extent than specifically a cognitive process.  Key is the recognition is that confidence is an seem of optimism--and optimism comes from finding structural similarities betwixt introduce challenges too past times ones that create got been mastered.  This is really relevant to the capacity to stick amongst one's ideas too atmospheric condition drawdowns.

*  I'm currently working on a projection that tracks long-term cycles inwards the stock market.  These cycles extend for months, non minutes or days.  It is at this horizon that momentum effects most clearly emerge.  For example, if nosotros larn dorsum to 2006 too rails the per centum of SPX shares that unopen inwards a higher house their 100-day moving averages, nosotros notice that the move past times one-half of readings (those inwards which in that location has been strongest breadth) final result inwards an average side past times side 50-day gain of +2.15%.  The bottom one-half of readings average a side past times side 50-day gain of solely +.33%.  The lion's part of the surgery differential occurs afterward a 20-day belongings period.  Think most what that agency for traders who prepare longer-term ideas but create got to merchandise them on curt fourth dimension frames too what that agency for short-term traders.  Also recollect most the implications for the electrical current market.

*  Stocks create got pulled dorsum inwards overnight trading, continuing to consolidate recent gains.  None of my breadth measures propose that we're yet at an oversold level, equally tin send away hold upwards seen below.  This mensurate tracks SPX shares trading inwards a higher house their 3, 5, 10, too 20-day moving averages.  (Raw information from Index Indicators).

Info!! Trading Notes: Calendar Week Of October 12Th

Friday, Oct 16th

*  Yesterday's abrupt rally as well as novel high unopen for this displace fits with the "buy weakness, sell strength" thought from yesterday's posting as well as is consistent with the thought of a marketplace that may receive got topped inwards upside momentum, but non price.  It was interesting to run across that nosotros had 609 stocks brand fresh monthly highs yesterday, downwardly from the 1274 novel highs terminal Friday.  Such breadth divergences tin give notice survive expected to dice on if nosotros indeed receive got made a momentum peak for this cycle.  It's when nosotros run across pregnant expansion of stocks/sectors making fresh short-term lows that nosotros demand to seriously consider the market's downside.

*  Meanwhile, volatility continues to survive crushed with VIX closing roughly 16, downwardly from roughly 27 belatedly inwards September.  My pure volatility mensurate also hitting novel lows as well as is getting unopen to levels that are associated with subnormal upside returns.  It has been challenging for traders to suit to the reduced volatility, which punishes trading on momentum as well as rewards patient, counter-trend entry execution as well as quick, tactical profit-taking.

*  Influenza A virus subtype H5N1 projection I volition start out this weekend is gauging the expectable size as well as duration of moves based upon volatility regimes.  My sense is that such an approach could aid making trading far to a greater extent than flexible as well as adaptive than it currently is for many traders.

Thursday, Oct 15th

*  So here's my query of the day:  Why practise thus many bastions of capitalism pursue alter via centralized planning?  From large corporations to finance firms, capitalist enterprises increasingly rely on key planning every bit they grow.  Indeed, if countries ran their economies the way many companies run their businesses, we'd sentiment them every bit communist/socialist bureaucracies hopelessly out of date.  We extol "leadership" inwards corporations as well as large organizations; maybe that's how dictators retrieve of themselves inwards centrally planned economies.

*  Influenza A virus subtype H5N1 adept purchase merchandise early on inwards the 24-hour interval reversed on the WalMart word as well as stocks traded off through much of the session yesterday, though they've recovered inwards overnight trading.  This dorsum as well as forth is what we'd hold off if nosotros late hitting a momentum peak for the electrical flow cycle as well as immediately are engaged inwards a topping process.  In that scenario, buying weakness as well as selling forcefulness makes sense.  Yesterday closed with farther weakness, every bit nosotros had 348 stocks brand novel monthly highs as well as 261 register fresh monthly lows.  That novel lows figure is the highest we've seen since Oct 2nd.

*  The weak retail sales divulge as well as WalMart word highlights what seems to survive a changed story:  instead of economical increment justifying a Fed hike, there's increasing verbalize of economical weakness as well as no hike this year.  If the topping out scenario holds, thus we're seeing a cycle peak cresting below the prior peak, volatility bottom at higher levels, as well as increasing concerns of recession--all bearish on a longer fourth dimension frame.  I volition dice on to monitor breadth measures to run across if this scenario is playing out.

*  I've heard from multiple sources that this has been a hard trading environment, with pathetic P/L, for many traders.  Per yesterday's entry, we're seeing reduced volatility inwards stocks as well as reduced volatility of volatility.  In such an environment, induce fails to extend--and becomes to a greater extent than consistent inwards failing to extend.  That form of reversal manner is hard for traders wanting to merchandise momentum or trend.  I'm non certain many traders explicitly run on adapting to changes inwards volatility regimes.  In such cases, sticking to a procedure is really a failure to adapt.

Wednesday, Oct 14th

*  Per yesterday's postal service nosotros indeed saw cost consolidation inwards Tuesday's session as well as we've immediately worked off the short-term overbought conditions.  According to the Index Indicators stats, at Tuesday's unopen nosotros had nether 19% of SPX stocks unopen higher upwards their three-day moving averages as well as nether 32% unopen higher upwards their five-day averages.  In general, especially every bit uptrends mature, I similar to survive a buyer when the bulk of shares autumn below their short-term moving averages as well as lighten upwards when the bulk are short-term stretched as well as rolling over.  My leaning is toward the purchase side if nosotros run across selling dry out upwards higher upwards the overnight cost lows.

*  Below is an interesting nautical chart that looks at the volatility of the pure volatility measure that I track, with the nautical chart going dorsum to August 17th.  Notice how the volatility of volatility spiked during the August reject as well as has since returned nigh levels seen prior to the market's drop.  Vol of vol tells us something virtually the stability of cost action, which inwards plow tells us something virtually the participation of marketplace makers.  If a marketplace is dominated past times marketplace makers, nosotros oscillate betwixt bid as well as offering as well as bulk cannot displace cost a keen deal.  If marketplace makers push clitoris dorsum as well as the gild bulk becomes to a greater extent than sparse, a given unit of measurement of bulk tin give notice deport on cost much to a greater extent than greatly.  Interestingly, when vol of vol is inwards its highest quartile since belatedly 2013, the side past times side 4 days inwards the ES futures average a gain of +.34%.  When vol of vol is inwards its lowest quartile, the side past times side 4 days average a loss of -.05%.  As marketplace cycles mature, nosotros tend to run across a crushing of vol but also of vol of vol.  I believe we're seeing a maturation of the acquaint marketplace cycle; if that's the case, nosotros should start out to run across breadth divergences on farther strength.  Yesterday's weakness alongside minor caps mightiness survive the starting fourth dimension of that pattern.

Tuesday, Oct 13th

*  Last week's punchy postal service on why nosotros merchandise emotionally seems to receive got struck a chord.  The hits on the postal service receive got been virtually 4x average as well as it's already dice 1 of the arrive at 10 posts inwards terms of hits.  One reader took law-breaking to the linguistic communication as well as style of the post, as well as I understand with that view.  One of the things I've learned every bit both psychologist as well as bring upwards is that how you lot deliver a message has every bit much deport on every bit the message itself.  But business office of that deport on is saving the punchy style for the most of import messages.

*  We had a irksome vacation merchandise yesterday, with rangebound action.  One mensurate that helped my trading yesterday was looking at the extremes inwards the NYSE TICK.  (I typically expression at one- as well as five-minute readings during the day).  If nosotros don't receive got many positive or negative extremes, it agency that institutions but are non active inwards the market.  It takes large, handbasket executions to acquire TICK higher upwards +800 or below -800.  If you lot don't acquire those extremes early on inwards the morning, you lot tin give notice anticipate a irksome 24-hour interval as well as oftentimes a rangy one.

*  As my intermediate term forcefulness nautical chart below shows, nosotros dice on to survive stretched to the upside.  This mensurate is a five-day moving average of 5, 20, as well as 100-day highs vs. lows alongside SPX stocks.  (Raw information from Index Indicators).  In a rigid cycle, this volition arrive at out ahead of price.  I noted yesterday that I wasn't thrilled with risk/reward as well as indeed we've pulled dorsum inwards overnight trade.  I would non survive surprised to run across farther consolidation near-term, but am non expecting an outright deport move.

 

Monday, Oct 12th

*  The weekend article on "flourishing" is, inwards my view, 1 of the most of import topics inwards psychology broadly as well as trading psychology specifically.  By as well as large, traders practise a decent task of keeping themselves out of damaging, negative states of heed as well as body.  They don't necessarily brand special efforts to hold themselves inwards optimal states.  As a result, nosotros never genuinely sense how good nosotros could perform across many areas of life, including trading.

*  This past times week's entries receive got focused on rigid marketplace breadth as well as the favorable implications of high buying strength.  That has led to buy-the-dips trading as well as has done good to this point.  Breadth continued rigid on Fri with 1274 novel monthly highs, the highest figure inwards a week.  (Raw information from the Barchart site).  We to a greater extent than oftentimes than non run across pregnant corrections afterward a catamenia of waning breadth.  That exactly hasn't been occurring to this point.

*  That existence said, I'm non enamored of the risk/reward right here.  As the nautical chart below depicts, nosotros receive got come upwards downwardly quite a flake on the Pure Volatility mensurate (volatility per unit of measurement of bulk inwards the ES futures), as well as that has historically led to subnormal returns.  We're also stretched to the upside on many of my indicators, which inwards the past times has occurred nigh momentum peaks (not necessarily cost peaks).  The put/call ratios receive got come upwards down; all that leads me to believe nosotros could acquire some consolidation early on inwards the week.  

*  Should nosotros acquire some pullback this week, my leaning would survive to resume the buying strategy.  Good short-term pullbacks would survive ones inwards which a bulk of shares unopen below their 3 as well as five-day moving averages as well as where nosotros run across to a greater extent than stocks give sell signals vs. purchase signals on the technical measures I follow, such every bit Bollinger Bands, Parabolic/SAR, as well as CCI.  The past times few days we've seen many to a greater extent than purchase signals than sells on those measures, but the divulge of purchase signals tailed off on Friday.

Info!! Lessons Inwards Trading Too Psychology - 4: Volatility

When nosotros sympathise what is going on inward the market, it gives us a psychological feel of clarity in addition to control.  Much of our worst, reactive trading occurs when nosotros experience out of control.  Looking closely at how the marketplace is moving tin render us amongst understanding--and that tin hold upwardly tremendously helpful non entirely to our trading, merely also to our trading psychology.

In hearing from many traders recently, I'm finding that they are having a hard fourth dimension adapting to the market's shifting volatility.  With volatility declining--and the volatility of volatility waning--we larn choppier marketplace conditions.  With volatility expanding--and greater vol of vol--we encounter momentum moves.  Many times, traders are zigging when they should hold upwardly zagging because they are misreading--or *not* reading--market volatility.

Above is a tool I created inward almost forty minutes from historical information via the e-Signal platform.  Here we're looking at the volatility (high/low range) inward each v infinitesimal bar inward SPY relative to the average attain for that same fourth dimension bar over the prior v trading sessions.  So, for example, we're seeing how today's 9:30 - 9:35 AM EST bar compares inward size to the average 9:30 - 9:35 AM EST bar for the prior v trading sessions.

Note how, from the really root of trading yesterday, nosotros were seeing relative ratios below 1.0.  That agency we're getting less motility inward each fourth dimension catamenia than we've seen over the by calendar week of trading.  Very speedily that tin alarm you lot to the fact that this is non probable to hold upwardly a high momentum market.  In the lower volatility environment, moves are less probable to extend in addition to nosotros desire to hold upwardly to a greater extent than selective almost taking trades in addition to opportunistic almost taking profits.

Note also how it would hold upwardly slowly to practise this relative volatility mensurate for whatever stock or index you're following.  We typically await closely at cost movements in addition to trends; we're less probable to test how volatility is trending.  Adapting our trading to the marketplace surroundings allows us to recognize when nosotros should hold upwardly trading moves in addition to when nosotros should hold upwardly fading them.  That tin eliminate a helluva lot of frustration!

Further Reading:

Trading With Relative Volume

Traderfeed Home Page in addition to Index

.

Info!! Trading Notes: Calendar Week Of October 19Th

Friday, Oct 23rd

*  The combination of prospects of farther QE from the ECB as well as positive turn a profit tidings breathed fresh life into the market, equally nosotros rose on substantially increased volume.  The increased book told us that fresh participants were coming into the market; the positive skew of the NYSE TICK told us that the participation was dominantly to the purchase side.  Picking upwardly those cues early on inwards the trading hateful solar daytime is an essential job of short-term trading.  Thursday's activeness was farther confirmation of the base of operations representative outlined yesterday, though I'm for certain opened upwardly to the possibility that, amongst the renewed buying, a momentum peak lies ahead of us.

*   Below is an interesting nautical chart that tracks "relative volume":  how book at each infinitesimal of the hateful solar daytime compares amongst the average book for that infinitesimal inwards SPY.  Influenza A virus subtype H5N1 value of 1.0 way that book is average for that fourth dimension of day.  Influenza A virus subtype H5N1 value of 2.0 is a total criterion difference inwards a higher house average; 3.0 is 2 criterion deviations inwards a higher house average; etc.  Note inwards the nautical chart how book yesterday was good inwards a higher house average, especially when the marketplace seat was rising.  Great tell.

*  Interestingly, novel highs *and* novel lows expanded inwards yesterday's trade, as well as modest caps cash inwards one's chips along to lag large caps.  I'm watching that human relationship closely, equally good equally the novel highs/lows.

Thursday, Oct 22nd

*  Weakness inwards modest caps noted before contributed to a sell off inwards stocks through much of the hateful solar daytime Wednesday.  My mensurate of buying vs. selling pressure, interestingly, did non present a bully surplus of selling.  This continues to facial expression to me similar a correction of the recent strength, non acquit marketplace seat behavior.  With fewer than one-half of stocks forthwith trading inwards a higher house their 3 as well as five-day moving averages, the risk/reward looks a flake ameliorate as well as I am opened upwardly to buying weakness that holds inwards a higher house the overnight lows.  I practise note, however, that the number of stocks making fresh monthly lows has expanded beyond the degree seen final week.  Continued expansion of that number would brand me to a greater extent than concerned regarding the market's downside.  

*  In short, my base of operations representative is that the August/September lows were meaning ones; that nosotros began a novel marketplace seat wheel off those September lows; as well as that the wheel has hitting a potential momentum peak simply has farther to run on the upside.  Waning breadth, especially amid modest cap stocks, as well as waning relative push clit amid EM shares concerns me nearly this base of operations case, however, as well as thus I'm cautious as well as updating views hateful solar daytime past times day.

*  Influenza A virus subtype H5N1 say for marketplace seat weakness prior to the August driblet was that nosotros were persistently seeing to a greater extent than shares trading below their lower Bollinger Bands than inwards a higher house their higher bands.  At present, we've been seeing the opposite: to a greater extent than stocks trading inwards a higher house their upper bands (see nautical chart below).  I'm watching that residuum closely equally yet a unlike sort of breadth mensurate that captures the relative breadth of push clit vs. weakness.

    


Wednesday, Oct 21st

*  Stocks showed continued resilience on Tuesday, amongst pullbacks limited, ultimately leading to higher daily lows as well as higher highs.  We likewise expanded the number of stocks making fresh monthly highs, ascent to 812 from 698.  Interestingly, VIX rose, simply realized volatility as well as book continued low.  We're seeing push clit inwards overnight trade, afterwards belatedly hateful solar daytime weakness yesterday--that continues the grind higher.

*  We've seen a driblet inwards 1 of my measures of breadth volatility, which tracks the variation inwards the number of stocks making novel highs as well as lows.  Going dorsum to 2010, when breadth volatility has been high, the adjacent v days inwards SPX induce got averaged a gain of +.52%.  When breadth volatility has been low, equally at present, the adjacent v days inwards SPX induce got averaged a gain of exclusively +.03%.  I cash inwards one's chips along to stance the risk/reward inwards the marketplace seat equally non especially appealing for multi-day positions as well as instead lean toward shorter-term tactical trading of intraday swings.

*  I am continuing to sentinel modest cap as well as mid cap issues to encounter if nosotros tin expand breadth or whether relative weakness inwards those groups tin expand to other segments of the market.  The Cumulative NYSE TICK has been ascent inwards recent sessions; buying push clit has been moderate, simply selling push clit has been low.  I don't await a major marketplace seat turn down until nosotros encounter a reemergence of sellers, as well as that's non occurring as well as thus far.

Tuesday, Oct 20th

*  The topping conduct referenced yesterday was evident inwards Monday's trade, equally nosotros terra firma higher inwards SPX.  I cash inwards one's chips along to banker's complaint relative weakness amid modest caps, which is contributing to breadth divergences.  We saw 698 novel monthly highs on Mon against 166 lows.  That is against over K novel highs on the seventh through the 9th.  That beingness said, breadth divergences inwards ascent markets unremarkably don't dot major reversals until nosotros encounter expanding numbers of shares making fresh lows as well as overtaking novel highs.  During topping processes, it's to a greater extent than of a rotation merchandise than a trending one, amongst volatility, volume, as well as momentum coming down.  That makes it an opportunistic trading environment, equally the lower volatility way that moves extend far less than they had when VIX exceeded 20.

*  One of the large mistakes traders brand inwards depression volume/low volatility environments is looking for the adjacent large move, rather than planning for the lack of movement.  To attain that planning, traders either require to merchandise brusk term swings opportunistically (intraday swings) or extend their asset periods to essay larger moves that ride out the shorter swings.  I discovery that pullbacks as well as bounces inwards NYSE TICK intraday assist to seat those shorter-term swings.

*  Should nosotros encounter modest caps as well as midcaps grab upwardly to the large caps inwards performance as well as displace to fresh highs, that would live on a worthwhile clue that the upside has farther to go.  I'd desire to encounter other marketplace seat sectors underperform before taking a longer-term bearish stance.

Monday, Oct 19th

*  I'll live on tweeting from Stocktoberfest the adjacent duet of days.  My latest Forbes article highlights a topic I'll live on addressing inwards my Stocktoberfest presentation:  how nosotros tin brand the transition from beingness goodness traders to becoming bully ones.  That way that repeated sense is non enough; nosotros really induce got to undertake directed training.  The Forbes piece describes how nosotros tin job psychology to sustain preparation efforts.

*  Here's a unproblematic way y'all tin know if you're genuinely engaged inwards a procedure of expertise development:  Are in that location *specific* things you're working on inwards today's trading; are y'all keeping score to encounter if y'all are genuinely making progress; as well as are y'all making ongoing corrective efforts amongst continued scorekeeping if you're non making progress?  If you're non intensively engaged inwards the above, y'all are non on a course of teaching of peak performance development.

*  Friday's trading continued the bounce from the short-term oversold province of affairs noted final week.  We 1 time once again are at a juncture where I'm non enamored of the risk/reward province of affairs here.  Intermediate-term measures are stretched to the upside; put/call ratios induce got come upwardly down; as well as nosotros cash inwards one's chips along to encounter fewer stocks brand fresh novel highs despite novel highs for this displace inwards the wide indices.  My pure volatility mensurate is at levels associated amongst subnormal forrad returns over a several hateful solar daytime basis.  All this is consistent amongst my overall perspective that we've seen a momentum peak for this marketplace seat wheel as well as are forthwith involved inwards a topping process.  That procedure tin extend for a spell before nosotros encounter an ultimate cost peak as well as eventual acquit phase. 

*  An uptrend is sustained when nosotros are able to register higher cost highs as well as higher cost lows across multiple short-term cycles.  So far, that is what we've been doing.  Until that blueprint changes, I'm reluctant to induce got brusk positions for anything to a greater extent than than short-term trades.
.

Info!! Lessons Inwards Trading In Addition To Psychology - 2: Volume

Every twenty-four hours the markets instruct us lessons inward trading in addition to psychology.  Our project is to snuff it expert students in addition to larn from these lessons to amend our craft.  In the start postal service inward this series, nosotros took a human face at detecting authorities changes past times assessing shifts inward buying in addition to selling pressure.  In this installment, we'll accept a human face at book in addition to its significance.

On whatsoever fourth dimension scale, book correlates real highly alongside volatility.  During the recent decline, for example, nosotros traded good over 200 meg shares inward SPY.  During the depression volatility force higher prior to the decline, nosotros commonly traded nether 100 meg shares.  Who are these additional participants?  For the most part, they are value players trying to accept payoff of unusually high or depression prices; short-term directional traders trying to accept payoff of the movement; in addition to longer fourth dimension frame participants stopping our of positions.  In short, when nosotros come across added volume, it way that the proportion of directional traders relative to marketplace makers has increased.  This facilitates marketplace movement.

Conversely, when nosotros come across book dry out up, it way that directional traders are non perceiving chance inward that instrument.  That leads to less displace on all fourth dimension scales in addition to what short-term traders sense every bit "choppy".

OK, alongside that inward mind, let's accept a human face at yesterday's merchandise inward the ES futures depicted above.  H5N1 publish of traders who sent me their journals made coin on the opening drive.  They recognized that nosotros were oversold in addition to that book was strong at the open, alongside buying significantly exceeding selling.  The combination of high volume, buying involvement from value participants, in addition to short-covering from those leaning the opposite way created a momentum thrust.

An of import way nosotros tin seat high book at the opened upwards is alongside the measure of relative volume.  In relative volume, nosotros accept the average book for each fourth dimension of twenty-four hours (above nosotros get got five-minute fourth dimension intervals) in addition to come across how today's book from 9:30 AM EST to 9:35 AM EST compares alongside the average book at that fourth dimension of day.  High relative book tells us nosotros get got high participation from directional players.  In the start 3 five-minute segments of the twenty-four hours yesterday, nosotros had book betwixt two in addition to 4 touchstone deviations to a higher house average.

Note how having the correct information helps yous brand the correct adjustment inward your trading.  We commonly holler back of psychology every bit helping our trading, but approaching trading the correct way--with the correct information--is a large business office of having the correct mindset.

Interestingly, a publish of the traders who wrote to me in addition to who made coin inward the early on morn displace gave dorsum coin midday.  Why is that?  

Click on the nautical chart to a higher house in addition to you'll come across how book moved meaningfully lower inward the midday hours.  By the fourth dimension nosotros bottomed during the two PM EST hour, the average five-minute book had fallen to almost one-fifth of what nosotros saw inward the opening periods.  With that waning of volume, nosotros get got waning volatility:  no to a greater extent than momentum.  Traders who did non pay plenty attending to book implicitly assumed that nosotros were withal inward a momentum market.  Every displace was taken every bit a potential breakout--only to contrary due to the lack of participation.  The trader who paid attending to book was able to adapt expectations in addition to either scalp smaller moves or stand upwards aside altogether.

When nosotros acquire excited almost making money, nosotros ofttimes snuff it tunnel-visioned in addition to don't stride dorsum to come across what book is doing.

Even worse, when nosotros acquire excited, nosotros don't stride dorsum to honor what is happening on the larger fourth dimension frame.  Notice how book is drying upwards every bit the sellers are coming in.  We had quite negative NYSE TICK readings during that two PM EST menstruation in addition to yet book was drying up.  Moreover, alongside all that selling pressure, nosotros couldn't retrace to a greater extent than than almost one-half of the early on morn move.  Recognizing that larger designing fix us upwards for the slowly twenty-four hours continuation of the upside momentum merchandise every bit book picked dorsum up.

This is how psychology integrates alongside trading:  The cognitive flexibility to shift betwixt cost activeness in addition to book in addition to the flexibility to shift from moment-to-moment to the larger fourth dimension frame complements the might to rails buying in addition to selling draw per unit of measurement area in addition to its shifts.  When nosotros snuff it self-focused in addition to P/L focused, nosotros lose that cognitive flexibility.  We no longer merchandise alongside perspective.  So much of trading success is using our psychology to let out patterns inward the market's psychology.

Further Reading:

Using Relative Volume to Track Market Moves

Home Page in addition to Index

.....

.

Info!! Book Too Volatility: What They Hateful For Our Trading

There is a unopen human relationship betwixt the book traded inward the stock marketplace on a given twenty-four hr catamenia in addition to the volatility of cost elbow grease during that day.  Since the outset of 2014, for example, the book inward the SPY ETF has correlated .87 alongside the truthful make for that day.  When nosotros merchandise to a greater extent than volume, it way that at that topographic point is to a greater extent than speculative, directional participation inward the market--and that tends to displace prices.  Savvy twenty-four hr catamenia traders realize that in addition to volition gravitate to stocks trading on elevated book for the day, every bit these render the greatest profits potential.

The human relationship betwixt book in addition to volatility, however, is non a simple, linear one--and this creates challenges for traders.  Here 's a elementary example:  During the concluding iii trading days, SPY has averaged book of roughly 72 i G 1000 shares.  The average truthful make during that catamenia has been less than one-half a per centum or roughly 1 SPY point.  At the destination of January, book over a iii twenty-four hr catamenia time period averaged over 170 i G 1000 shares.  The average truthful make during that catamenia was nigh 1.8 per centum or over 3 SPY points.  Volatility picked upward past times to a greater extent than than you lot would get got expected every bit a linear purpose of volume.

The nautical chart inward a higher house of "pure volatility" represents the total of volatility nosotros obtain from a given unit of measurement of book inward the ES futures.  Note that, at present, the same total of book is giving us i quarter of the elbow grease every bit it did when nosotros made a depression inward mid January.  Not entirely do nosotros run across book changing over time; every bit marketplace cycles mature, the total of elbow grease provided past times volatility changes.  

The bottom business for the electrical current marketplace is that nosotros are seeing less book *and* each unit of measurement of book is giving us less elbow grease than before this year.  That drying upward of elbow grease way that nosotros tin await significantly less follow through on marketplace moves than nosotros mightiness commonly expect.  That has huge implications for merchandise management:  the sizing of positions, placement of stops, in addition to institution of cost targets.  It besides has meaningful implications for trading psychology, every bit the lack of elbow grease makes it slow to overtrade the marketplace inward the seek to larn something going.  

What that way inward usage is that it's of import to anticipate the total of participation in addition to elbow grease inward the marketplace during your merchandise in addition to element that into your planning.  Less book way that the proportion of directional participants to marketplace makers is reduced.  That makes for a dissimilar sort of movement, alongside reduced momentum/increased choppiness inward the brusque term.  One of the most mutual trading mistakes I run across is that traders do non brand proper trading or psychological adjustments to shifts inward volatility regimes.

Further Reading:  Why Trading is So Difficult
.

Info!! What Volatility Way For Your Trading Psychology

Ah, if it were exclusively that easy!  I took a await at the average truthful attain for the past times 5 trading sessions inwards SPY.  It was almost 2.1%.  By contrast, at the July peak, the 5 twenty-four hours average truthful attain was almost .53%.  So basically, inwards price of realized cost movement, nosotros induce got quadrupled volatility inwards a bridge of almost 2 months.

What does that hateful for trader psychology?  Imagine quadrupling your trading size over the bridge of a pair of months.  How mightiness that comport on your trading?  By placing a magnifying drinking glass on the dollar size of your P/L moves, it accentuates the potential psychological comport on of wins as well as losses.  Influenza A virus subtype H5N1 random streak of 4 losing trades on quadruple size could wipe out a substantial component subdivision of prior profitability.  Conversely, random large winning trades could convince a trader of his hot paw as well as atomic number 82 to overconfidence as well as overtrading.

When volatility increases past times several orders of magnitude, non exclusively are the moves inwards the administration of the tendency accentuated, simply also the moves against the trend.  That agency it's rattling piece of cake to induce got a merchandise displace 1% against you lot inwards minutes, where it would induce got taken a few days for such a displace to materialize inwards the slower, depression volatility market.  If your trading size is the same inwards a high volatility marketplace equally a depression volatility one, you lot induce got effectively magnified your size past times several times.  That does non net income good amongst many people's risk tolerance.

The argue this is of import is that spikes inwards volatility associated amongst intermediate-term marketplace pullbacks are to a greater extent than mutual than recent sense would suggest.  Check out this rattling helpful spider web log post from Philosophical Economics.  Since World War II, nosotros induce got seen 10% marketplace corrections almost 20% of the fourth dimension as well as 15% corrections over 12% of the time.  This ensures that purchase as well as concur investors volition induce got meaningful drawdowns, as well as it also guarantees that career short-term traders volition sense spikes inwards volatility.  Such spikes tin displace correspond meaningful opportunity, simply exclusively if one's emotional volatility is non tied to that of the market.

Further Reading:  Volume as well as Volatility
.